Oil prices rose on Monday, pushing BP (LSE:BP) shares higher. Crude prices jumped as US President Joe Biden failed to secure a commitment from the Saudi Arabian rulers over oil production.
Biden, who had promised to make Crown Prince Mohammed bin Salman a “pariah” of the international community during his campaign, visited Saudi with the aim of getting the kingdom to increase oil production.
However, foreign minister Prince Faisal bin Farhan Al Saud quelled speculation about an output increase, suggesting that oil had not been discussed during the bilateral meetings. He insisted that production would be based on the market assessment of the OPEC+ nations, which includes Russia.
Brent crude rose 2.5% to $103.77 after reports of the meetings emerged. So, what does this mean for the oil market, and should I buy BP shares?
Oil prices
The profitability of oil companies is largely dependent on the price of oil and the margins it can make. So, what’s happening with the oil price?
Well, today’s jump aside, there are conflicting opinions on where oil will go next. Analysts at Citi Group recently predicted oil could fall to $65 a barrel in 2022. They suggested it could even slump to $45 by the end of 2023 if a global recession occurs.
Meanwhile, JP Morgan analysts have suggested that benchmark prices could hit a $380 a barrel should Russia take action against Western allies.
The thing is, both seem like very feasible scenarios. It’s highly likely that the global economy will start to contract this year, but equally, as the situation in Ukraine gets worse for Russia, Moscow is likely to take further action against the West for supporting Kiev.
I’m fairly risk averse, so I don’t tend to like this volatility much. But it worth noting that at $100 a barrel, BP is making a lot of money.
Prospects
BP, like other oil companies, had been attempting to reduce its break-even point during the pandemic. The firm said it wanted to reduce its break-even point to $35 by 2021. While that may have been achieved, in this high oil price environment, I expect they’re bringing more costly barrels online. Having said that, BP’s profits will be soaring.
It is also worth noting that BP, like other firms, has downstream operations. So these companies are making a killing on their retail operations too. While crude prices have been going down over the past two months, prices at the pump haven’t. So margins are good across the board.
In the long run, I believe we’re entering a period of inflated commodity prices. Scarcity, I contend, will keep oil prices higher over the next decade, so BP may see this bumper year become the new norm.
Concerns
Well, we’ve mentioned that the oil price might tank. But I also recognise that BP is in transition, moving slowly away from hydrocarbons and towards renewable energy. Transitions are risky business and can cost a lot. So I’m definitely bearing that risk in mind.
Would I buy BP stock?
Is BP right for my portfolio? Actually I think the future is pretty promising for BP, however I think there will be better entry points later in the year. My hunch is that oil will fall further, and the BP share price with it.